With Bitcoin Positioning Back to Greed in the Fear and Greed Index, What Can We Expect?

On August 1st, 2020 (at 06:20 UTC), the price of the most popular cryptocurrency in the world, Bitcoin, hit its year-to-date high and its biggest July gain since 2012.

We are looking at 29.65% gain in a single month and the 2nd highest monthly close ever, according to data from cryptocurrency market data provider Cryptocompare.com. Prior to this BTC (Bitcoin) has closed below $11,000 every month since reaching almost $20,000 in December 2017^th.

However, it is unclear yet if this rally is sustainable. The bitcoin fear and greed index hit 80/100 , or Extreme Greed on Aug 1^st. And even after the market correction over the weekend it still remains high, which may indicate that the currency is overpriced.

But before we discuss this, let’s take a look at what a fear and greed index is.

What is the Fear and Greed Index?

Volatility, as one of the main characteristics of financial market, proposes the use of some tools to predict price movement. The Fear and Greed Index (F&G Index), used to measure the two primary emotions that affect investors in terms of how much are they willing to pay for a certain asset, is one of those tools.

It was developed by CNNMoney and based on the premise that extreme fear might result in assets trading below their realistic prices, and greed might result in bidding higher than their actual worth.

From understanding the Fear and Greed Index, we conclude that people tend to get greedy when the market is rising. This is often a consequence of a belief that they will ‘miss out on an opportunity’. On the other hand, they tend to sell their assets when the prices start falling.

According to the financial concepts resource Invesopedia.com, CNN examines seven different factors in establishing the levels of fear and greed in the market. Measurements are made on daily, weekly, monthly and yearly basis, and it is believed that they gauge whether the market is fairly priced.

Bitcoin Fear and Greed index

As crypto market behavior is also subject to extreme volatility, the software optimizing platform alternative.me developed its own Fear and Greed Index for Bitcoin and other major cryptos.

According to the index’s official page, data is gathered daily from five different sources in order to measure sentiment in the market. These are;

• Volatility (25 %)
• Market Momentum/Volume (25%)
• Social Media (15%)
• Surveys (15%) 
• Dominance (10%)
• Search Trends (10%)

Analyzing the BTC Fear and Greed Index, we can predict the move of majority of investors. And this is what gives us an advantage, by saving us from our own emotional overreactions.

Let’s look at one-year chart of the BTC Fear and Greed index below:

From the chart above, we see that BTC F&G (Fear and Greed) Index is now at 80/100, or Extreme Greed, which may indicate that the currency is overpriced. This was certainly the case the last time such a significant rally took place, in Dec 2017.

The 2017 Peak and After

The price of a single BTC reached an all-time high of almost $20k, on December 17^th, 2017, At one point in the rally that led to this peak, its value rose more than 5% in 24 hours. As profitable it was for investors who were HODLing, this movement was, nonetheless, shocking.

This market event was a strong invitation for new investors and traders to jump on the bandwagon, pushing BTC to its furthest position towards greed on F&G Index. As we concluded before, this is usually an indicator of upcoming market correction. And one most certainly took place, as we can see from the chart below.

2018 - Year of the big fall

During the following year (2018), just a few weeks after skyrocketing, the price fell rapidly. It had crashed to below $7 k by March. An improvement was seen in April and July. However, this was only provisional and temporary. By the end of the year it had sunk even further to below $3.5 k.

2018 ended with BTC value hitting its lowest yearly worth, positioning itself strongly towards fear in F& G Index, amongst investors.

2019 – Time of high expectations

The overall crypto market remained in a state of instability during 2019. Over the year, it saw considerable rises and falls. Valued slightly below $3,5 k in January, BTC rushed up to a maximum of over $13 k, in just three months. But just as everyone thought that it would top its 2017 peak, the price started to fall, and it failed to meet these expectations.

Throughout year we experienced different behaviors of the asset. BTC had a new comeback in price and volume, going up to around $10 k by June.  However, as history tends to repeat itself, as the year came to an end, the price fell back down to around $7 k and has been oscillating ever since.

Are We Looking at a 2017 Scenario?

At the beginning of 2020 BTC was just below $10 k, after which the price went down to around $5 k with the market crash in March.

After its sudden bounce to almost $12 k in the beginning of August this year, opinion on the future of the price remains divided.

Observing this year’s price fluctuation, some analysts have high expectations. They point to the information that a large portion of BTC holders are ‘sitting in profit’ but have chosen not to sell yet. It is believed that this should be taken optimistically, because it implies confidence that the price will continue to rise.

It is believed that breaking past $11.5 k increases the potential for the asset to surge even higher in following weeks. This is mainly due to the fact that same amount was a pivotal figure during the year that followed the 2017 peak.

However, there are a lot of other factors that should be taken into consideration. One of them is the fact that, even after a downside correction, BTC price did remain stable above $10,5 k, in the week that followed its year-to-date high. But the Fear and Greed Index is still hovering around 75.

This would indicate that the price is still being sustained by greed as investors expect another surge.

Nevertheless, according to Glassnode, a blockchain data and intelligence provider, “Investors should remain cautious in their optimism, given the fragility of financial markets in the current day and age”.

Conclusion

A sustained period of greed on the markets will inevitably be followed by a period of fear as we saw in 2017. Whether the price of Bitcoin will able to break above $11,5 k in the near term remains an uncertainty. But even if it does, we believe that it will not be able to sustain that level in the long-term and will inevitably fall to below $10 k.